NAREIM Sustainability Meeting

May 4, 2021

Climate risk is emerging as a key area of concern for institutional investors – with one-third of real estate investment managers revealing that all or more than 75% of their portfolios were covered by climate risk data and analysis.

However, members revealed during the NAREIM Sustainability Meeting, that climate risk data and modeling was very much in its infancy – and wasn’t ready to fully integrate into underwriting.

A live poll conducted during the meeting revealed the following bifurcation in climate risk data usage among real estate investment managers:

• 21%. No portfolio coverage related climate risk data and analysis

• 29%. Less than 25% portfolio coverage

• 7%. Between 25%-50% portfolio coverage

• 7%. Between 50%-75% portfolio coverage

• 21%. Between 75% and 100% portfolio coverage

• 14%. Full portfolio coverage

The NAREIM Sustainability Meeting, held on May 4, heard from three risk data providers – and in a closed-door session, discussed how they were using climate risk data, and the successes and challenges of what they were seeing.

Key highlights included:

Integrating climate risk into underwriting and budgets:

• One member asked how the industry could balance climate risk models which were forecasting 30-50 years into the future, against 10-year discounted cash flow models. They said whether peers were applying terminal cap rates and credit losses, and how others were budgeting for cap-ex related to climate risk?

• There was an agreement that climate risk data is in its early stages and is not yet integrated into deal underwriting. Members said the data was simply too new to be able to back-test it properly against existing asset data. But it was helping inform higher probabilities of risk in the acquisition process – and helping inform exit cap rate discussions.

Providers and duration:

• Who are people using? There are a number of real estate climate risk data providers in the market, and while NAREIM members said they predominantly used 427, The Climate Service, Rhodium, MSCI and ImageCat, one member said the market was expected to see consolidation in the coming years.

• How long is the contract? 86% said they sign a 1-year deal as the market place is changing so fast.

Team leaders:

• Sustainability professionals/resources were the key functional groups assessing climate risk and analysis, followed by Portfolio Management and Asset Management. Transactions and Architecture and Engineering groups were in joint fourth place.

Members also heard that there were three key issues to think about when understanding climate risk modeling and data:

• It’s not just about the asset. What is the community and supply chain risk at the asset-level? Where are the points of vulnerability if the community’s ability to operate is lost, such as with power grids, flooding, etc?

• Relative climate risk – how do you compare to your peers? New climate risk models are emerging for a majority of the ODCE core funds in the US.

• A computer alone cannot provide all the answers on climate risk. There remains a large degree of interpretation and analysis by real estate teams.

Check out the meeting presentations from MSCI, XDI and Longevity Partners here.

ALSO

One in four real estate investment managers ensure their sustainability leads report directly to the CEO, according to a member poll at the NAREIM Sustainability Meeting this week.

During a discussion on benchmarking ESG teams, processes and operations, members revealed that 40% were reporting directly to the CEO, while another 40% said there was just one reporting layer between the CEO and the head of ESG and Sustainability policies, whether that was represented by a dedicated team member or chair of an ESG committee.

Members shared examples of how their ESG teams were structured, the move from committee to dedicated personnel, certifications used, and ideas for driving ESG policies forward. Other highlights also included:

• Certifications and easier wins, particularly for multifamily assets. Energy Star was recommended owing to its market penetration and low cost. IREM and NGBS were also highlighted, although education among tenants should be expected.

• Emergence of ESG-linked loan provisions. This has become an emerging trend over the past few months, particularly among REITs, linking loans to specific sustainability metrics at the corporate/portfolio level. While there was limited economic impact from the loans, it was another way to improve and drive ESG strategies and actions.

Check out all the meeting presentations, poll results and attendee list here.